The total cost of procurement is what matters

What spend experts know about purchasing that you don’t

May 24, 2018

Some believe that purchasing is a job that can be done by anyone, because it’s “only” buying and people buy stuff all the time. But when it comes to professional business procurement, that’s not true. Even people who pride themselves on their product and vendor research skills and their negotiation savvy do not understand all the nuances and details of procurement in today’s workplace.

Most of us associate the procurement process with sending out bids and proposal requests or RFPs and then comparing prices, but professional procurement is a more comprehensive, measured and planned approach to attain the products and services a business requires.

Of course, professional procurement involves getting the right price, but it also encompasses other criteria:

Understanding business needs and goals, both operational and financial

Satisfying specific user, department and division needs

Assessing quantities, volumes and deliveries to meet deadlines and schedules

Identifying and selecting the right vendors and sources

Negotiating mutually acceptable term and conditions

And the larger the organization, the more complicated array of options and considerations come into play. It turns out that procurement and spend experts know quite a bit about purchasing that even the C-suite doesn’t.

Total cost of procurement and fully loaded costs

Procurement and spend management professionals take the approach called TCOP or Total Cost of Procurement. TCOP requires looking at multiple facets of a transaction, not just the selling price. It involves understanding the whole cost—including administrative and operational expenses like shipping and processing and payment of the vendor’s invoice.

TCOP considers the Fully Loaded Cost, which in accounting terms means reporting both fixed and variable costs. For example, the fully loaded cost of a cup of coffee at Starbucks considers all of the following and more:

In addition to the cost of the coffee beans, transportation of the beans and expense of roasting, grinding and brewing the coffee (all direct spend items that are directly incorporated into the product), you also have indirect costs like the barista’s salary and training, the green apron uniforms, real estate, furnishings, electricity and internet access so you can sit down and surf the web while you enjoy your beverage.

Knowing all that, you can better assess if your $3 cup of joe is a bargain or not, and it’s the challenge of managing all those costs that determine how competitive and profitable a business will be.

Professional procurement training and credentials

Most procurement professionals today are well-trained and skilled at their jobs, especially in large organizations. More than learning basic negotiating, professionals understand the legalities to procurement as well as subject matter expertise.

The Institute for Supply Management offers certification programs that allow individuals to be recognized as Certified Purchasing Managers or Certified Professionals in Supply Management.

These professional procurement designations require understanding of four modules:

Analyzing the suppliers, identifying the requirements for purchasing the product and then executing and implementing the contract.

Vendor management, from negotiations and closing a deal to maintaining a good relationship with a vendor.

Enhancing value and teaching strategies such as supplier analysis, forecasting the future and managing inventory.

Management of the procurement function within the organization and management of the resources and people within the department itself.

As a Certified Purchasing Manager or CPM myself, I see the big-picture considerations of procurement and spend management, and I also know the many nuances and details involved in each of these four areas.

Understanding your total procurement costs

Every organization needs to buy goods and services, but how they go about it and the challenges they face can be quite different and unique. As I’ve already said, the larger the enterprise, the more complicated procurement becomes. You may have remote offices around the globe, remote workers, different divisions and extensive product and service offerings. Smaller organizations face limited resources and procurement skills, often relying on office managers or administrators to do the job.

Yet all my clients share the same basic demands of running a profitable—or at least financially sound—operation, which is why we focus on TCOP for all our clients.

Outside spend support for large organizations

In the large organization with a formal procurement function and often a vice-president of purchasing, we are value-add support. Enterprises are running lean these days, with staff consumed by day-to-day duties, leaving little room for strategic planning—we free up some time. We also offer benchmarking assessments and vertical expertise in spend categories, contracts, vendors and such. Due to our experience across our large client base we bring specific subject matter expertise and current market knowledge to our clients. It is difficult to foster knowledge about vendors and their internal driver unless you deal with them on a daily basis. Even the best negotiator will not know intricacies of vendor motivation, margin driver or new market developments that may significantly influence the cost of a deal. Another important role we sometimes play is -being more direct and forceful when necessary with vendors, so the procurement team can maintain stronger, less stressful relationships.

Outside spend expertise for small-medium organizations

Smaller organizations and professional service providers, like law firms or private investment firms, may have a seasoned office administrator or manager responsible for the procurement function. Oftentimes these individuals do a great job. They know the workings of the organization like nobody else, and technology has greatly expedited some of the routine tasks for them. Yet they might lack the professional procurement and indirect spend expertise I’ve been talking about, including no understanding or awareness of the concept of total costs.

For example, one client had an administrative assistant who enjoyed going to the local Office Depot to buy office supplies and equipment, and she prided herself on going to other stores when she found a bargain sale. Think of those total costs—time out of the office, driving and parking expenses, possible overtime, opportunity costs of that person’s time—not to mention liability in the event of an accident. Those pens and ink cartridges just got a lot more expensive. And even as more purchasing goes online, a comprehensive approach is still lacking. For small-medium organizations we deliver both expertise and support.

The bottom line is your financial bottom line. What people don’t know or fail to remember is that a good procurement expert can have a faster, more direct impact on profitability than your best rainmaker or sales rep. Every dollar that we uncover through our total cost of procurement approach stays in your bank account, rather than going to an outside vendor.

Susan Walker

Susan Walker is LAC Group's Director of Procurement Strategy and an expert in procurement best practices including sourcing, negotiating, vendor relationship management, and contracts. She is a Certified Purchasing Manager and holds an M.B.A. from the Lake Forest Graduate School of Management.